Euro Bounces Back as Middle East Hopes Rise

The euro slipped to $1.163, hovering near one-month lows, as investors braced for prolonged high energy prices due to the war in the Middle East, which risks fueling broader inflation and dampening economic growth. Brent remained close to a four-year high after US President Trump delayed further strikes on Iran but ordered the military to prepare for a "full, large-scale assault" if negotiations fail. Market expectations for European Central Bank tightening have moderated slightly, though traders still price in an 80% chance of a 25-basis-point rate hike next month, with two more likely by year-end. Recent data underscored the challenges: Eurozone growth slowed to 0.1% in Q1 2026, the weakest since Q2 2025, due to energy supply constraints tied to the Middle East conflict, while inflation rose to 3% in April, the highest since September 2023 and well above the ECB’s 2% target. Investors now look to Thursday’s flash S&P Global PMI surveys for further monetary policy clues.

The euro climbed to $1.165, attempting to recover from a one-month low of $1.161 reached earlier on Monday, following renewed optimism about a Middle East resolution, after reports that the US proposed a temporary waiver on Iran oil sanctions, with Tehran open to a long-term nuclear freeze but not a full dismantlement of its atomic program. Last week, the euro fell over 1% against the USD as the economic fallout from the Iran war and expectations of faster-than-expected ECB rate hikes darkened the growth outlook. Eurozone growth slowed to just 0.1% in Q1 2026, the weakest since Q2 2025, due to Middle East conflict-related energy supply constraints. Meanwhile, inflation jumped to 3% in April, the highest since September 2023 and well above the ECB’s 2% target. Investors now await the flash S&P Global PMI surveys due Thursday for further monetary policy signals. Markets have priced in three ECB rate hikes by year-end, with a 90% probability of the first move in June.

The euro held just above $1.16, near its weakest since early April, as economic fallout from the Iran war and expectations of faster-than-anticipated ECB rate hikes dim the growth outlook. Brent crude is nearing four-year highs, with US-Iran talks on reopening the Strait of Hormuz at a standstill. President Trump’s frustration with Tehran and the prolonged strait closure raise the risk of sustained oil price spikes, potentially fueling global inflation. Eurozone growth slowed to just 0.1% in Q1 2026, the weakest since Q2 2025, amid energy supply constraints from the Middle East conflict, which disrupted oil, its byproducts, and LNG flows. Meanwhile, inflation surged to 3% in April, the highest since September 2023 and well above the ECB’s 2% target. Investors now await the flash S&P Global PMI surveys for further monetary policy signals. Markets have priced in three ECB rate hikes by year-end, with a 90% chance the first move comes in June.